Health Reform WK-EDGE Best practices to consider in negotiating payor-provider convergence arrangements
Friday, July 8, 2016

Best practices to consider in negotiating payor-provider convergence arrangements

This article is adapted from the June 2016 edition of Reimbursement Advisor, a monthly newsletter from Wolters Kluwer Legal and Regulatory, U.S.

By John Barnes

Health care reimbursement is going through a metamorphosis. Payors are entering into arrangements where they look more like providers. Likewise, providers are entering into arrangements where they look more like payors. Consequently, the long-established line between payors and providers is blurring.

Payor-provider convergence takes many forms. Payors are acquiring provider systems and operating them as unitary enterprises. Other payors are purchasing practice management companies or forming narrow or tiered networks with providers and steering a significant portion of business to the preferred providers. Alternatively, providers are becoming more experienced in population health management and are taking on more of the financial risk for patient care. These arrangements take on many forms, including capitation and shared risk arrangements, as well as more direct assumptions of risk, such as purchasing or sponsoring health plans.

There are multiple causes for the convergence of payors and providers. The overarching cause is the industrywide recognition that the provision of health care in the United States is inordinately expensive in relation to its clinical outcomes, and that costs must be reduced significantly to keep the system sustainable. At a more granular level, factors driving convergence include:

  • Industry acceptance that the fee-for-service model is a major contributor to ballooning health care costs;
  • Massive influx of patients into the managed care environment caused by the implementation of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) and the expansion of Medicaid;
  • Medicare's endorsement of integrated payors and providers through the accountable care organization (ACO) and Medicare Shared Savings Program (MSSP) regulations;
  • Pressure on payors and providers from large purchasers of health care to slow the growth of health care spending;
  • Pressure on providers to reduce costs from patients with consumer-driven, high-deductible health plans; and
  • Implementation of penalties for hospital readmissions and hospital-acquired conditions.

While the drive toward convergence is inevitable, the road is littered with failed attempts to integrate payors and providers. Capitation models have a checkered past and only recently have reemerged as providers and payors seek to partner to reduce costs.

Many providers resist being included in tiered provider networks unless they are included in the tier with the highest patient benefit. From the provider's perspective, the narrow network only works if the provider is included in the network, but getting into the network may require sacrifices in reimbursement levels that don’t make financial sense even if the steerage to the provider is increased.

Compared with the traditional fee-for-service model that remains dominant in the health care industry, payor-provider convergence still is in its infancy, and, as a result, there is no such thing as a "template" agreement for such arrangements. At a minimum, the agreement must be specifically tailored to the business needs of the parties and the particular needs of the patient population. That said, there are certain best practices that can be employed to give payors and providers a better chance at a successful transition from the fee-for-service model. This article addresses some of the payment, legal and other practical considerations involved with the convergence of commercial payors and providers.

Best Practices in Negotiating Convergence Arrangements

Best practices in negotiating convergence arrangements incorporate multiple factors. Those factors include the issues of provider solvency, claims appeal management and quality metrics, among others, as outlined below.

Provider Solvency

Entities accepting financial risk must be sufficiently capitalized to accept such risk both at the time of initial contracting and throughout the contract period. A major component of any capitation or other risk arrangement is the acceptance by the provider of the financial risk of not only their own services but also the services that the at-risk provider arranges for other providers to provide.

This brings with it the risk that the provider will become financially insolvent and either unable to pay other providers or slow in paying other providers due to cash flow issues. This causes major disruption in patient care because other providers may refuse to accept referrals of patients.

Depending on applicable law, it also may leave the rendering provider without recourse for payment and the payor potentially liable for "negligent delegation" of the obligation to pay for claims to a financially unsound at-risk provider.

Some states have enacted solvency standards that are used by state insurance commissioners and other enforcement agencies to measure the solvency of capitated providers (42 C.F.R. sec. 422.359, 28 Cal.Code of Regs. sec. 1300.75.1, Texas Insurance Code sec. 1272.152, Florida Ins. Statutes sec. 641.2261). These standards have a variety of metrics that permit the regulator to assess the current financial condition of the capitated provider and to assess whether the capitated provider is at risk of failure.

Financial solvency regulations typically require quarterly reporting, but some states require less frequent reporting. In some states, the enforcement mechanism of solvency standards empower the insurance commissioner to demand that the capitated provider deposit a surety amount with the regulating agency or, in more serious situations, unwind the risk arrangement (28 Cal.Code of Regs. sec. 1300.75.4.5(a)(7)).

Regardless of whether an arrangement between payors and providers is in a state that imposes financial standards on entities that accept financial risk, it is critical that payors and providers agree to contractual provisions that give one or both parties "early warning" of impending insolvency. State regulations provide a good starting point for the information that the parties should exchange on a routine basis. The information can include:

  • Cash on hand;
  • Ratio of cash to claims;
  • Net equity;
  • Incurred but not reported claims; and
  • Percentage of claims paid/not paid within regulatory time frames.

Keeping tabs on the at-risk provider's financial solvency is critical in capitated arrangements but also can be valuable in a non-capitated shared-savings arrangement in which the provider accepts downside risk. While a shared-risk arrangement does not carry the risk of dissatisfied downstream providers that is inherent to capitated arrangements (unless the shared-risk provider sub-capitates for referred services), there still are risks associated with the at-risk provider being insufficiently capitalized, such as, the provider withholding medically necessary care or the failure of a key network provider. Some payors seek to receive high-level information about providers in downside shared-savings arrangements in order to ensure that shared-risk providers remain able to provide services to members.

Claims Appeal Management

Another best practice is to establish an appeals management process. When a provider or other entity that is not the payor is responsible for processing and paying claims, it is inevitable that the provider will deny claims and that the patient or provider of the claims will appeal the denial.

The prevailing standard is that the entity that issued the denial will process the first-level appeal. If that entity upholds the denial after the first-level appeal, the agreement should specify which entity is to process the second-level appeal. In some instances, payors want to retain the right to adjudicate all second-level appeals.

Some payors want to retain the ultimate right to approve the provision of patient care or see the second-level appeal as the last opportunity to avoid regulatory scrutiny and/or bad publicity. The second-level appeal also is the payor's last opportunity to manage utilization and control costs, particularly when the service in question is a service for which the payor is at financial risk.

Of course, providers may not want to cede to the payor the ability to overturn denials. This particularly is the case when the service in question is a service for which the provider is financially responsible. To avoid future disputes over who is entitled to process second-level appeals, the parties’ arrangement should include a matrix that specifies the parties’ respective rights with respect to appeals.

Downstream Risk Agreements

Providers in all types of convergence arrangements may wish to enter into additional risk arrangements with "downstream" providers, which are typically referred to as "subcapitation" arrangements. These arrangements carry with them many of the same risks that are inherent to the first-level capitation arrangement. But subcapitation arrangements also have the added danger that if the subcapitation arrangement falls apart or the subcapitated entity becomes insolvent, the first-level capitated entity may need to refer patients to out-of-network or other non-contracted providers to fulfill patient care needs. Medical costs to the primary at-risk provider under these circumstances will be substantially greater than under contracted arrangements, and the first-level capitated provider may very quickly find itself in dire financial straits.

To avoid such problems, the arrangement between the payor and first-level capitated provider should specify whether that provider is permitted to enter into risk arrangements with other downstream providers. The parties should consider whether it is in the parties’ best interest to limit subcapitation arrangements or, at a minimum, impose some level of financial reporting requirements on the downstream provider.

Carve-outs for High-cost Outliers and Other Contingencies

While many markets now have combinations of providers and provider groups that are well-capitalized, on balance, the payor likely is always going to be better capitalized than the provider and better able to predict and shoulder the insurance risk associated with high-cost cases.

Consequently, some arrangements place limits on the downside risk that providers can accept. This can take the form of a dollar threshold limitation or a loss percentage limitation (i.e., losses limited to 50 percent of health care costs in excess of threshold). Stop-loss protection also can protect providers for unexpected, outlier cases, but costs for such protection can be steep.

Another strategy is to carve out high-dollar cases from the calculation of losses so that high-cost cases do not affect the calculation of the potential savings. Providers, however, should be careful to only carve out high-cost claims from the calculation of the shared savings amount—and not from the calculation of the provider's downside risk—otherwise, the provider may not be able to benefit from the protections of any contractual limitations on the provider's downside risk.

The Role of Quality Metrics

Most shared-savings arrangements use quality metrics as a "gate" to the provider receiving shared savings. If the provider meets the quality standards established by the contract, the provider will be entitled to a portion of the shared savings.

The purpose of this gatekeeping function is to create strong incentives for the provider to focus on quality. Some shared-savings arrangements also use quality metrics as a "ladder," in which the degree to which the provider performs relative to certain quality measurements determines the amount of shared savings received by the provider. Contracts may have both gates and ladders or one but not the other.

The major challenge in negotiating gate and ladder provisions is agreeing on the metrics that will be used to measure quality. One option is to adopt the quality metrics used by the MSSP. The final rule for the MSSP adopted 33 quality measurements in four domains: (1) patient-caregiver experience; (2) care coordination and safety; (3) preventive health; and (4) at-risk populations.

Using these measurements as gates and ladders in a commercial contract makes sense for some parties because many of the measurements already are in use in other Centers for Medicare & Medicaid Services programs, so providers likely will have systems in place to track their performance against the measurements.

There are, however, no requirements that commercial ACOs or other shared-savings arrangements use any particular quality measurements, so the market has responded with a wide range of quality measurements for non-Medicare businesses. Some parties have decided that the 33 MSSP-measured data points are too unwieldy in the commercial environment and have adopted different measurements that are simpler, less numerous or more closely aligned with the patient population in question. Others have ignored the MSSP measurements entirely and have adopted their own quality measurements.

The focus on quality has placed an enormous premium on providers establishing and maintaining an information infrastructure that is robust, geared towards measuring quality, and secure. Because the quality metrics likely will be different depending on the payor, it also forces providers to develop information systems that are nimble and can track different quality metrics depending on the patient population being measured.

Providers must be mindful that agreeing to meet certain quality metrics and actually tracking performance towards meeting those goals are two entirely different things, and significant ramp-up time will be needed for a provider to establish an information infrastructure that can effectively track performance. To address this reality, some plans and providers agree to track a smaller subset of quality metrics during the first year of a shared-savings agreement and fold in additional metrics in subsequent contract years.

In Conclusion

Payor-provider convergence arrangements are here to stay, and best practices are just now starting to emerge. To avoid past failures, payors and provider must carefully apportion risk and create mechanisms for early warning that the arrangement might fail. Time will tell whether this emerging paradigm yields the cost savings that are so necessary for the system to survive.

About the Author:  John Barnes is a partner in the health care practice group of King & Spalding in Sacramento, California. He may be reached at [email protected].

For more information on Reimbursement Advisor, call 1-800-638-8437 or visit

Attorneys: John Barnes (King & Spalding)

MainStory: StrategicPerspectives AccountableCareNews ManagedCareNews MedicaidExpansionNews ProviderPaymentNews QualityNews

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